N.Y. Insurance Department Advances First Principles-Based Regulation

November 5, 2007

New York Insurance Superintendent Eric Dinallo today released a draft regulation that he says would make the New York Insurance Department the first in the nation to establish principles-based regulation. The draft includes 10 principles for the industry and is accompanied by 10 principles for regulators.

The draft regulation will be distributed for discussion by the industry and consumers and will be on the agenda of the New York State Commission to Modernize the Regulation of Financial Services, which Dinallo chairs.

Principles-based regulation focuses on assuring desired outcomes more than the details or technicalities of traditonal regulation. It aims to reduce unnecessary and inconsistent regulation and hold regulated companeis to ethical practices, while also providing consumers with more efficient markets and better responsiveness.

Dinallo said the switch to this type of regulation is needed for New York to remain the financial capital of the world. “The financial services marketplace is extremely creative and innovative and our regulation must be just as nimble, ” he said, pointing to principles-based regulation as the “best way to protect consumers and promote fair and honest competition.”

“The essential goal of regulation is not rote compliance with a long list of rules, but ensuring appropriate outcomes. These principles focus both the regulator and the regulated on such outcomes and tell regulated companies our expectations for how they will conduct their business. It brings the issue of compliance to the highest levels of a company – to the Board of Directors and the management committee. It provides the flexibility to fit the different business models of thousands of different companies, while improving consumer protection,” Dinallo said.

“As a code of conduct, the principles are reasonable rules that can be easily incorporated into the business philosophy and operations of regulated parties with little or no expense. In fact, most regulated entities should already be operating in accordance with such principles,” Dinallo said.

He stressed that the principles will not expose companies to additional private lawsuits because New York’s Insurance Law generally does not provide for private rights of action. “Only the regulator can enforce the principles. This is, in fact, a significant competitive advantage for New York,” he added.

“The principles ask companies to be ethical to their core, rather than focusing on technical requirements. Indeed, if a company is generally conforming to the principles, but violates a rule in a way that does not harm the public, we should take that into account,” Dinallo said. “It is clear that detailed rules alone have not prevented misconduct. In fact, principles eliminate loopholes and gaps between rules that could allow activities that harm consumers or mislead regulators.”

The modernization commission will discuss the principles at its upcoming January meeting.

“This is an opportunity for the commission to focus on a key competitiveness issue – the ability of our regulatory system to keep up with ever-evolving and innovative markets,” said Scott Rothstein, executive director of the commission. “The principles do not pre-empt existing law or regulation. But they make clear the fundamental purposes behind those laws and regulations and can serve as scaffolding around the existing regulatory structure, providing support and guidance as products, practices and markets evolve.”

“Principles-based regulation gives the regulator the right tools to begin changing its relationship with the regulated. An essential part of a principles-based approach is an open door between the regulator and companies so the companies can seek and receive guidance. We expect to turn regulation from periodic ‘gotcha’ exams into a continuing dialogue. Companies that deal honestly with the department can expect to be treated honestly in return. But we will, if anything, be more stern with serious violations,” Dinallo said.

This approach has already been applied in the settlement of the World Trade Center insurance claims and in the implementation of the workers’ compensation reforms, where the department has introduced free-market principles, according to Dinallo.

This is the third draft regulation circulated by the department for public comment in the last month that reflects the principles-based approach. The first requires property insurers to create a reserve for catastrophes such as hurricanes. The second treats top-rated non-U.S. reinsurers the same as U.S. companies on the issue of posting collateral.

The new approach will mean a different role for the department. Dinallo has also developed a proposed list of principles for regulators, which he intends to issue as a Circular Letter.

The department said it will circulate a working draft of the proposed 10 principles-based regulations to the insurance industry and consumers. It will then go through the formal proposal process, which includes publication in the New York State Register and a formal 45-day comment period for written comments.

10 Principles for the Insurance Industry

(1) A licensee shall lawfully conduct its business with integrity, due skill, and diligence.

(2) A licensee shall take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems.

(3) A licensee shall maintain adequate financial resources.

(4) A licensee shall observe proper standards of market conduct.

(5) A licensee shall pay due regard to the interests of its clients and treat them fairly.

(6) A licensee shall pay due regard to the information needs of its clients, and communicate information to them in a way that is clear, fair and not misleading.

(7) A licensee shall manage conflicts of interest fairly, both between the licensee and its clients and between clients.

(8) A licensee shall take reasonable care to ensure the appropriateness or suitability of its advice and discretionary decisions for any person or other entity that is entitled to rely upon such.

(9) A licensee shall ensure that the assets of any client for which the licensee is responsible are adequately protected.

(10) A licensee shall interact with the superintendent and other regulators in an open and cooperative way, and shall disclose to the superintendent any information relating to the licensee of which the superintendent would reasonably expect notice.

10 Principles for Regulators

(1) Regulators, and the regulatory system as a whole, should assess risk comprehensively and concentrate resources on the most important areas.

(2) Regulators should be accountable for the efficiency and effectiveness of their activities, while remaining independent and objective in the decisions they make.

(3) Guidance from the regulator should be readily available and easily understood.

(4) Interested parties should be consulted as appropriate prior to issuance of written guidance by the regulator.

(5) When developing new regulations, the regulator should consider how they can be implemented and enforced using existing systems and data to minimize the administrative burden on regulated entities.

(6) No investigation or inquiry should take place without an appropriate basis.

(7) The regulator should not require a regulated entity to provide unnecessary or needlessly duplicative information.

(8) All regulatory action should be proportionate to the issue being addressed.

(9) Regulators should allow and encourage competition and innovation, while ensuring against insolvency and protecting consumers and markets, and only intervene as necessary to protect consumers and markets.

(10) Regulators should respect the responsibility of a firm’s senior management for its activities and for ensuring that its business complies with requirements and hold senior management responsible for risk management and controls.

Copy of draft regulation: https://readme.readmedia.com/news/attachment/699/Principles_Based_Regulation_Draft.pdf
Source: New York State Insurance Department

Topics Legislation New York

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